Peak Oil is a concept derived from the work of a Shell Oil engineer back in the mid-1950s named Dr. M. King Hubbert. To the dismay of his employer, Hubbert wrote a paper from his study of the behavior of oil wells. Naturally enough, when wells are young and contain a lot of pressure, the oil comes out pretty easily. That flow then diminishes over time, and the oil is harder to extract. It becomes fairly easy to predict, Hubbert said, when the maximum output from a given well will be reached. After its peak production for say a year’s time, output will then decline over time even though there may still be a good amount of oil left in the ground.

That concept can be taken from an individual well to an entire oil field, and to a nation, and even to an entire globe. At the time, Hubbert did in fact predict that the US would reach Peak Oil in 1970, to the scorn of many other oil men at the time.

He was almost dead nuts on.

Enter Chuck Taylor. He is a former senior logistic executive for Nabisco and others, and grew up in Texas oil country. In the early 2000s, he started taking a look at what was happening with oil markets and costs, and dug deep into Peak Oil, which almost no one had heard of at the time. He became alarmed at what he was learning, and wondered why there weren’t more people discussing trends in oil, and its ultimate impact on our supply chains - and perhaps even our very way of life.

So he started Awake! Consulting really as almost just a service to the industry to lay out where he sees energy prices going, and what governments and companies ought to be doing about it. He estimates he has spoken in front of some 8000 people in total over the last few years on this topic, and that included a few hundred on a videocast two weeks ago on our Supply Chain Television Channel.

I was somewhat knowledgeable and concerned about Peak Oil before. After seeing Taylor’s presentation, I am both a lot more knowledgeable and a lot more worried.

So I will start with what is really the bottom line: we are not going to run out of oil any time soon. What we are running out of, as should be readily apparent right now, is cheap oil. And the time to prepare for this eventuality is right now.

Taylor says on a global basis, Peak Oil may have already been reached, and if not quite yet it will be over the next few years for sure. While oil demand is actually declining slightly in highly developed markets like the US, much of Europe, and Japan, it is going to continue skyrocket in developing nations in Asia, the Middle East, Latin America and Africa. That will much more than overwhelm the decreases in consumption in the US and elsewhere.

Consider this fact: the developed world uses about 14 barrels of oil per person per year. The developing world uses only about 3 barrels per person per year, and China by itself still just 2. That is simply going to change, Taylor said on the broadcast. "They’re going to get their share," was how he put it. Just think of the impact on supply and demand as that annual usage normalizes across the world.

Taylor used the graphic below, which shows what he calls “Energy Returned on Energy Invested. (EROEI)” It illustrates how much oil itself was used to produce a barrel of oil over time and across different sources. It is a mind-opener. Decades ago, 100 barrels of oil were produced from just one barrel of energy consumed. That dropped to 30 produced by the 1970s, and 15 today from traditional sources. Deep water? Now you get just 8 barrels returned from each barrel used. What about tar sands, which many view as a lifeline of sorts? Now it’s just 5 to 1. And that doesn’t include all the other huge costs in deep see drilling or processing tar sands, versus the Beverly Hillbillies type oil that just spewed out of the ground when the right hole was dug decades back.

And that is again the main point - these and other sources will provide oil - it just won’t be cheap oil anymore. These exotic sources set a price floor based on costs, they are hard to find and develop, and for there to be cheap oil, "it needs flow, like Saudi Arabian oil," Taylor says.

At one point in the broadcast, I referred to "Peak Oil theory," and Taylor in his very friendly way shot back "it's not a theory, it's a fact. Oil wells are very predictable."

And so consider this chart. The picture it paints is not a good one. First, look how few new reserves are being discovered, versus the huge oil field finds in the 1950-80 period (gray bars, versus small expected future finds in the yellow bars).

You can also see in the black line how production levels, despite rising overall global demand, have been flat-lining in recent years: just what you would expect with nearing Peak Oil.

The red dots indicate the amount of production needed to keep pace with demand. Something is going to have to give.

Taylor thinks not nearly enough companies are really adequately preparing for the changes that are coming (we sub-titled the broadcast Is your Supply Chain Already Obsolete?), and that governments aren’t doing much of anything. And he really believes that the way our supply chains and society work is going to be altered as a result of rising oil prices (and soon). There may be many more new regulations on the movement of freight, as just one example, Taylor says.

Yikes! is the reaction most of us would and should have to all this.

There was a lot more. The broadcast is available on-demand here: The End of Cheap Oil Part 1. I encourage you to view it. In part 2 on March 15, Taylor is going to offer his thoughts on what companies and governments should be doing, and offering his “Peak Oil Checklist.” I am looking forward to that one too. You can register here: The End of Cheap Oil Part 2

Are you worried about Peak Oil? Is a game changing energy situation soon going to be upon us? Or do you think alternative energy sources, etc. will carry the day in time? Let is know your thoughts at the feedback button below.

Great article focused on a key aspect of supply chain management. I have two different, though related, perspectives of why supply chains go off the rails.

1. To me the craziest supply chain metric is plan conformance. In truth I mean measuring plan conformance at more than a daily level, perhaps allowing that in fairly stable industries this could go out as far as a week. This is crazy because of the assumption that he plan was correct in the first place. Several studies, including one by Terra Technology, have shown that a weekly level forecast is typically about 52% accurate, whereas during NPI this drops down to 35%. Admittedly Terra's customers improve this to 70% accuracy for mature products, but this still leaves 30% forecast error. (According to Terra, the typical forecast accuracy has improved only a few % over the past 8 years.) Since the demand plan is typically used to drive the supply plan, how accurate is the supply plan? So why are we forcing the organization to conform to a plan that is inherently wrong, well inaccurate anyway.

2. All plans are based upon assumptions of both demand and supply. These are assumption and, in many cases, assumptions are wrong to some degree. And stuff happens too. Trucks break down, machines fail, yields drop, ships get delayed, containers fall off of forklifts, etc. Today's extended, global, and outsourced supply chains amplify the effects this disruptions have on the supply chain because there is less time to react because it takes longer to understand the impact of an event because of lower visibility. While every effort is made to buffer against uncertainty and disruptions, most companies cannot afford the inventory required to mitigate against all the risks.

What I am missing in the discussion about supply chain management is what do we do when the plan is wrong. The discussion for the past 25 years has been about creating the perfect plan, the optimal plan. This is all fair and well if you can get anywhere close to a perfect forecast, but every indication is that we're not going to get there any time soon. If we can't get to a perfect forecast, and therefore we can't get a perfect plan, what skills and capabilities should we develop to deal with the inevitable mismatch between actual demand and planned supply? The first is the ability to detect when actual demand is different from planned demand quickly.

More important is the ability to determine the impact this mismatch has on the supply plan. How much of the actual demand can be satisfied by supply plan? Where are the major mismatches? The second is that once these have been identified, how does the supply chain respond quickly and effectively?

Our view is that planning is the first step. The question is where will the next breakthrough come from: Learning to plan better, or learning to detect and respond to real demand quickly and effectively.

Trevor Miles
VP, Thought Leadership
Kinaxis

More on Metrics and Performance:

Another great article that poses a great set of questions.

Actually, I think both hypotheses are probably correct.

Wrong metrics: I have seen many organizations track performance to a set of metrics, doing things they knew were not optimal for the business, but that drove a payoff, such as a bonus entitlement. There are others that have not worked through what really counts, and how to measure it. This might be a small company that hasn't taken the time to work out how to measure customer service as they grew. When the warehouse got full, they couldn't get orders out, customers started complaining, they realized they might be missing something. Or management only expect purchasing to place orders, so they don't measure savings or risk mitigated, because no one cares.

Wrong Targets: I am reading "Good by Choice" by Jim Collins, and the three core concepts are highly relevant. I think they can help companies develop the right plans, and select the right metrics to track progress and identify issues early.

Fanatic Discipline: Pace your organization to work at a reasonable tempo all the time, and they will become really good at doing a solid job. Continuous improvement and lean/6 sigma initiatives can stretch that every day, major upgrades can change the game.

Empirical Creativity: small investments with clear objectives allow you to work out what the right big investment is, whether it's new equipment, a new product or service, or a new market.

Productive Paranoia: Understanding risks and evaluating how significant they are and what to do about it if they happen. I am not suggesting that anyone could have forecast the Iceland volcano eruptions and the effect they had on flying, the Japanese Earthquake/Tsunami, the Thai and Australian floods, or the unrest in the Middle East. But brainstorming on what major uncertainties could certainly have informed contingency plans. Air Travel was halted after 9/11; the 2004 tsunami disrupted southeast Asia for months - Haiti is still suffering from the destruction; There have been signs of worker unrest in China (apparently many employees have not returned to work after they went back to celebrate the New Year). Great companies, if you believe Collins, have a plan to deal with this unpredictable disruption. Surges and collapses in activity can be assessed this way too.

Great job Dan, keep up the good work.

Nick Seiersen

I would like to argue that Supply Chain Performance Management is not a topic to take off the list, but instead focus the discussion on "which metrics matter and why", and steering customers to knowing that it doesn't have to be that hard -- especially with analytics technology and applications in the market today.

Our SCPM product which won the SCC technology innovation award, makes it easier for supply chain professionals focus on metrics that matter, and provides them an easy path to identify the root cause of a metric trend or an exception generated by the system based on a combination of metrics, and proactively manage the situation. Even more compelling if focused on metrics that matter is then the comparison to cascading goals - financial and operational.

You're right: target setting which starts to help establish the framework, would help compare performance against a certain goal/objective. The app also has a way to capture these targets -- example: what should my cash-to-cash cycle time be? But it requires an organization change in mindset, which I do hope your columns can steer the companies to.

Padmini Ranganathan
Analytics for Industries and Lines of Business
SAP Solutions Marketing

SUPPLY CHAIN TRIVIA ANSWER

Q: About how many gallons of gasoline are contained in a barrel of oil?

A: In theory, about 42, if all the oil was used to produce gas. But of course, some is used to produce diesel, jet fuel, kerosene, etc., depending on the type and quality of the oil, refinery capabilities, and market conditions.